business plan – Page 6 – TP Javeton WebNet

The need for seed money

Practically every new business which is created starts out with a great idea that usually needs shaping, molding and a lot of long hours and hard work if it is to become a viable and competitive member of industry. However, most business do not reach the level of industry competitor without some kind of monetary investment.

Let’s face it, after you’ve been awaken in the middle of the night, or stayed awake with a business idea that you’re convinced will change the world, only to learn next morning that you’ll need money to get the business moving. What do you do if you don’t have that ‘seed money’?

If you own a home, you’ll remortgage (refinance) it. Take it from me cause it’s what I did to start my own real estate agency in the 1980s. I was fortunate enough to have owned a home, but not everyone with a great idea for a business owns a home. So what are some other options?

Investors and Equity

Practically every economy is built upon the backs of small business and entrepreneurship practioners. Every day someone comes up with an idea that will make a great business. Every day, these same people wonder how they will come up with the cash to get the business off the ground. The classic answer is to look for investors, and this is where things can go bad.

If you’re seeking investors for your business, you are going to need to form a business entity. Corporations and LLCs (Limited Liability Companies) are the most popular, and give you the ability to trade ownership interest in exchange for cash contributions.

With a corporation, investors will buy shares in the corporation. With limited liability companies, the investors will buy membership interests. Regardless, this traditional exchange gives rise to a problem common among small business owners. They often end up giving away too much equity.

From Joy to Misery

A common mistake made by new business owners is to give away too much equity when getting initial cash contributions. This occurs because they let insecurities impact their evaluation of the business. Instead of giving away two percent of equity in exchange for $50,000, they often give away ten percent. Let’s look at an example.

An industrious person starts a business selling digital gadgets. S/he prepares a business plan and realize s/he needs $250,000 to get everything up and running. s/he has $50,000, but need to find the rest somewhere. So s/he forms a corporation with 1,000 shares and start approaching potential investors.

S/he offers 100 shares for $25,000 and finds five investors that invest $125,000 in exchange for 500 total shares. In summary, s/he now has $175,000, but has given away half the equity in the business. While s/he is not happy about this, s/he is still so excited and enthused about the business idea that s/he shrugs it off.

Compounded misery

The business gets rolling and s/he starts selling gadgets like crazy after one year. This gives rise to a serious cash problem because s/he’s getting orders, but can’t fill them because of cash flow problems. To make a proper go of the business, s/he needs another $100,000.

Where is s/he going to get $100,000? The business is only one year old, so a bank won’t touch it. The original investors haven’t seen penny one back, and are unwilling to put more money in. The only option is to sell another 400 shares for $100,000. Fortunately, s/he sells the shares, raises the money and stays in business. However, there is a major problem.

In raising all of this money, s/he has now sold off ninety percent of the equity in a business S/HE started, but now s/he’s left owning 100 shares and only 10 percent of the business. This is going to severely impact this owner’s physical, emotional and overall motivational well being. Slowly but surely, s/he’s going to become very bitter. It was s/he that had the idea and s/he is doing all the work! It really isn’t fair that s/he only owns 10 percent of the business! But that’s how it is. End of example!

Guard your equity…fiercely!

On second thought, this impression may come on very quickly. Regardless, the business is destined to experience major problems because the primary motivating force is no longer motivational. Unfortunately, many people with business ideas run into this problem.

If you are starting a business, guard your equity at all costs. Selling equity should be a last resort. Try to get loans or trade profit sharing in lieu of selling equity. If you must sell equity, do so only in small percentages. You do not want to be the small business person in the example above.

Digital & Electronic Products – Unbeatable in Quality and Price!

Ideas do materialize… and don’t

How many times have you had a great idea that you just knew was going to be the foundation of next multi-million (billion?) dollar company? If you’ve had the idea(s) but don’t see the beginnings of that fortune 500 company yet, don’t worry because you’re certainly not alone in that big-idea-big-dreamer’s club. I have had a number of those ideas – and believe me – they’re still coming, and I’m still working with each one in its own allotted time.

Having said that, there are a few owners of multi-million/billion dollar companies whose ideas did materialize. But the path from great idea to huge success evidenced by enormous assets is often a long and difficult one. The key is to recognize the uniqueness and potential of the idea and commit to working with it.

To take the idea to fruition

The “spark” for many entrepreneurs is seeing an opportunity that doesn’t yet exist. Ted Turner, for example, launched CNN because he perceived that people wanted more television news than they were being offered. It took a lot of patience on Turner’s part to realize the vision, but he had read the market in a way that few “experts” did at the time.

In realizing the promise of CNN (the idea), Turner demonstrated another facet of the entrepreneurial spirit. Persistence! There are a lot of bright ideas that never reach fruition; but taking a “raw” idea and converting it into a successful business model is, to restate the point, very hard and time consuming work.

And that work never stops. No matter how innovative your idea, the competition is always just behind you. With anything less than constant creative effort on your part, they may not stay behind you. If you’re still with me, here is where I want to elaborate a little on a few thoughts I had as to why everyone isn’t an entrepreneur.

The few million details

No opportunity is a sure thing, even though the path to riches has been described as, simply “…you make some stuff, sell it for more than it cost you… that’s all there is except for a few million details.” The devil is in those details, and if one is not prepared to accept the possibility of failure, one should not attempt a business start-up.

It is not indicative of a negative perspective to say that an analysis of the possible reasons for failure enhances our chances of success. Can you separate failure of an idea from personal failure? As scary as it is to consider, many of the great entrepreneurial success stories started with a failure or a number of failures, and more often than not the latter was true.

Some types of failure can indicate that we may not be entrepreneurial material. Foremost is reaching one’s level of incompetence; if I am a great programmer, will I be a great software company president? Having the wrong attitude can also be fatal, such as excessive focus on financial rewards, without the willingness to put in the work and attention required. Addressing these possibilities requires an objectivity about ourselves that not everyone can manage.

Failure: An option to grapple with

Other types of failure can be recovered from if you “learned your lesson.” A common explanation for these is that “it seemed like a good idea at the time.” Or, we may have sought too big a “kill;” we could have looked past the flaws in a business concept because it was a business we wanted to be in. The venture could have been the victim of a muddled business concept, a weak business plan, or (more often) the absence of a plan.

When small businesses fail, the reason is generally one, or a combination, of the following:

Inadequate Financing – often due to overly optimistic sales projections;
Management Shortcomings – such as inadequate financial controls, lax customer credit, inexperience, and neglect, and;
Misreading the Market – indicated by failure to reach the “critical mass” required in sales volume and profitability, usually due to competitive disadvantages or market weakness.

In a recent Wall Street Journal article titled “Why My Business Failed,” Ken Elias cautions that “even if the concept is right, it won’t fly if the strategy is wrong.” Still, on being asked whether he would start another business today, he answers: “Absolutely. The experience is fabulous, exciting and the possibility of success is always there.”

In fact, even when you have an entrepreneur’s checklist – which might serve as your road map to this relatively unknown path to business development and ultimate entrepreneurial success, the possibility of failure still looms large because there are so many other aspects to business creation, development and management that one misstep or seemingly inconsequential error could be the proverbial straw that breaks the camel’s back and cause the collapse of your entire enterprise. So plan well, be brave, be passionate and don’t give up.

Digital & Electronic Products – Unbeatable in Quality and Price!